[DrBubb]

source: The UK's sorry state

[DrBubb]

tinecu, on May 7 2009, 03:18 PM, said:

I guess we are moving from stage 8 to 9 to 10...
I think the central banks will resist raising rates for some time yet.

That's right.
Watch for the currency to continue to weaken, and people to start getting their assets out of the UK, where they can.

Banks are going to be pushed to lend, so those who cannot sell assets, will borrow against them, and move the money out. This will serve to increase the indebtedness and vulnerability of the UK. Meantime, the government will not want to admit it is happening, because that we act as encouragement for others to do the same.

Slowly, the UK is creeping up on the "No Exit" point, intentionally blind to the dangerous path that they are on.

Meantime, what do I see on Bloomberg at this very minute?:

They are talking about the BofE expanding the purchase of bonds, to keep rates down. This is a very temporary fix, to a unfixable problem that Brown's government has baked into the cake through years of ignoring outrageous and dangerous house price inflation. Thanks to that huge, world-leading house bubble. Spain, Holland, and the UK are stuck in a similar very sad corner. But the per capita size of the UK's debts is bigger, and London has relied heavily on grotesque growth in its financial sector.

DrBubb, on May 7 2009, 10:42 AM, said:

A chart that should keep every UK homeowner and UK Prime Minister awake at night !



The UK is truly bankrupt if incomes fail to rise alot, and/or property does the "normal" overshoot to the downside.

This is based on the following statistics on historical Price-to-Income ratios / attachment=1049:housepriceratios.pdf
What if it overshoots, and falls back to the 24% discount seen after the last crash?

Also discussed on this GEI thread: The UK's HPC will be much, much worse than 1990

And also : On SP

This post has been edited by DrBubb: 07 May 2009 - 09:39 AM

[DrBubb]

From similar thread, on Main: http://www.housepric...howtopic=113628
... and, here's the : CW Radio Podcast (Dominic Frisby interviews Michael Hampton: Ja.25th, 2009)

1/
Yeah it's funny though, when it's presented so graphically it looks kind of chicken and egg... I'm always a bit suspicious of such 'obvious' predictive stories...is an economy's default state trade or non-trade?

History says the former, so somehow commodities will continue to flow, but what we have to trade will be worth considerably less...human cost

2/
Interesting and informative, but I don't fully understand step 7 ("Deflation triggers excessive money supply growth")
Should it be "Fear of deflation triggers excessive money supply growth"? Otherwise, can you explain what is meant?
(Yes)

3/
Bubb - at #10 the walls go up.

Thenceforth you have...
11/ Producers source local labour or are supplanted by those who do
12/ Labour costs soar in local labour markets
13/ Production moderates in local markets
14/ Security of supply becomes a national concern
15/ Foreign nations with little more than surplus capacity to trade in increasingly shallow markets begin to starve
16/ War
(I sincerely hope and believe that War can be avoided with some wise leadership)

4/
dr bubb, what is the "no exit" point?
(The point at which there is no turning back, and a Greater Depression, starting in say, 2010, becomes inevitable. At about the same point, it may prove very difficult to pull up stakes and leave the UK, because the currency may lose its value or convertibility. That's why I am suggesting that people get their money out while they still can, and even think about moving abroad.)

More: The Merits of the UK are Considerable, but Get pit while you still can

also, where do you see the best place to be putting sterling cash now?
(Sorry, I cannot say for sure. My own free cash is in: C$, A$, and HK$)

5/
Temp fixes i agree, next stop, failed gilt auctions, rising interest rates, propping up our trashed currency, we are the next Iceland.
A trade off;
1. Trashed economy
or
1. Trashed currency
Which one, i say they will raise interest rates and say to hell with the indebted, once the banks have recapitalised.

Because this is what it is all about, create the indebted, recapitalise the banks, deflate earning power, then watch them walk away and watch the man on the street fight for a crust.

This post has been edited by DrBubb: 08 May 2009 - 12:22 PM

[DrBubb]

Good post, which I missed

Panda, on May 7 2009, 12:58 PM, said:

Temp fixes i agree, next stop, failed gilt auctions, rising interest rates, propping up our trashed currency, we are the next Iceland.

A trade off;

1. Trashed economy

or

1. Trashed currency

Which one, i say they will raise interest rates and say to hell with the indebted, once the banks have recapitalised.

Because this is what it is all about, create the indebted, recapitalise the banks, deflate earning power, then watch them walk away and watch the man on the street fight for a crust.

I think the UK will try to hold rates down (to prop up a sliding Property market) until Sterling falls to new lows, like $0.85-0.90 to the Dollar, or even half the recent low of $1.40 - that's $0.70. Then, ot will be forced to raise rates, and that will usher in the final wrenching low in Property by 2011-13. Property will be very cheap (like maybe 50-60% off the high, or more), because jobs will be scarce and incomes and rents down.

The average man will be so shell-shocked by then, that they will be looking to blame someone. The culprits in government will be kicked out by then, and the UK may be angry enough to fight a War. I do hope this can be avoided.

Funnily enough, if the UK had bit the bullet, and held rates higher in 2005, it might be through most of the Property Crash by now. This current corrupt government, led by the worst leader in the UK's history and one of the worst on the planet, is not anywhere near ddressing the real problems, they are still throwing money at temporary solutions, like reducing rates to artificially low levels. This allows the savy to exit property at the expense of the suckers who buy. The buyers will be bagholders riding overvalued purchases down into the grim times and low prices in the UK's future.

Perhaps Labor leaders are tipping off their friends to "get out while they can", before the inevitable rise in rates hits the property market.

[DrBubb]

This chart fits into the argument on this thread, I believe.



If a Depression does arrive, obviously there will be continuing job losses, and evn if the government finds some magic way to keep rates down (without crashing the Pound), then there will be a big negative impact on Uk House prices.

Ask yourself, does this government do the smart thing for the long term future growth of Britain? Or does it simply take measures that thry to improve matters in the very short term?

[mattyfc]

This does not seem to be a very well reasoned pathway. These steps do not neccecerily follow one and other. The main problem in the country is the over inflated housing market and associated spending boom. The UK still has a lot of competative advantages over our more structured European Partners.

The euro will come under major threat from Spain, Ireland etc and will not survive in it's current state as it makes no economic sense at all.

The USA have an even larger credit bubble than us and similar long term debt problems.

It is pretty sensible to have 0% rates currently to try and deflate the market slowly. A rapid crash would do far more long term damage to the economy.

We need to have a long term plan to prevent HPI in the future and to reduce consumer and public debt levels. This is our real problem and politicians need to wake up and create policy to deal with this. Facing and dealing with these problems despite them not being popular will be a real test of our democracy.

We can be thankfull that the financial structure of the country is currently still in tact which should have prevented a 1930's esq depression and the inevitable unemployment, political uphevel and war that it would have brought.

Instead will will have a severe reccession, 3-4m unemployed and house prices will fall back to there long term average.
Things could be a lot worse.

[FashionFanatic]

DrBubb, on May 10 2009, 12:14 AM, said:

This chart fits into the argument on this thread, I believe.


London bespoke tailor

If a Depression does arrive, obviously there will be continuing job losses, and evn if the government finds some magic way to keep rates down (without crashing the Pound), then there will be a big negative impact on Uk House prices.

Ask yourself, does this government do the smart thing for the long term future growth of Britain? Or does it simply take measures that thry to improve matters in the very short term?

I think there should be 2 goals in which the government should focus. A short and a long term economic goals.

[okaycuckoo]

Very plausible, Dr Bubb.

How do you see £ falling so much against $, when the US has similar problems?

Reserve currency, flight to safety, the US is screwed but the rest of the World is screwed more?

[DrBubb]

MY OWN VIEWS on the issue, of whether a WAR with China is inevitable :
==========

1/ The war in Afghanistan/Iraq was not a trough war. A trough war comes after the final crash in the stock market

2/ A trough war does not bring the recovery. First debt needs to be written off, repaid, or restructured; and these are the real efforts that set the stage for recovery - not the war! It is dangerously wrong to see the war as a solution to an economic crash. This notion is rather obviously wrong, but is still widely held, and should be rubbish by thinking people.

3/ A war with China is not inevitable, and Hong Kong and maybe Taiwan can play a role in preventing one

4/ If a war does come, it is likely to be "through proxies" in someplace like Iran, with energy as its focus.
Or the US may not even be involved at all

5/ The debts that the US owes to China are a potential flash point

.

== ==

Back-up:
Chart for US stocks

I called the March 6th low, using the chart above. I expect a bear market rally to SPX-950/1000, followed by new lows; probably at SPX-400/600 in Q4.2010 (or so)

.......... US Debt to GNP - differing measures : overall debt in "all sectors" ....... :: ... US Government's "national debt" ...
..

...the Big Drop in Debt to GNP into the 1950's allowed the cycle to start again.
The war debts did nothing to help...

Fitting the Debt together with Economic growth

How Much do we Borrow for a $1 growth in GDP?
Finally, I want to give you a chart from my old friend Ian McAvity from his latest newsletter Deliberations, which he has been writing for 36 years! Basically, it makes the point that the amount of new debt in relationship to GDP is rising. We borrowed in one form or another $5.70 for each $1 rise in GDP last year.

Debt in all forms rose $7.86 trillion for the previous 8 quarters to $48.8 trillion dollars. Nominal GDP was only $14.1 trillion. This is of course unsustainable. At some point, debt growth must slow dramatically. As the world deleverages, decreasing debt and the resultant slowing of consumer spending will become a head wind for GDP growth.
/source: http://www.marketora...rticle4210.html

(some may be interested in this comparison. Brown is bringing back Britain's "debt-sick" ailment):
UK Public debt compared with US

[DrBubb]

Thanks for the posting, and the articulate argument, Matty

mattyfc, on May 11 2009, 07:15 AM, said:

This does not seem to be a very well reasoned pathway. These steps do not neccecerily follow one and other. The main problem in the country is the over inflated housing market and associated spending boom. The UK still has a lot of competative advantages over our more structured European Partners.

The original "pathway" was worked out for the US, but it fits the UK as well, maybe better. It is a LIKELY pathway IMO, not a certain one. I agree that the "inflated housing market" is a problem, but it isnt the root problem. Since it could be survived with limited pain, if there wasnt so much DEBT associated with houses. Hong Kong (where I live now) went thru a 69% drop in house prices, and it survived that, mainly because Hongkongers had alot of savings, and much less bank debt against their homes. The current debt to house prices in HK is about 30-33%, less than half of what exists in the UK, and when you add in the savings, net debt is negative here. That's the way it should be in a healthy economy. it';s a very different story in the over-geared UK economy.

mattyfc, on May 11 2009, 07:15 AM, said:

The euro will come under major threat from Spain, Ireland etc and will not survive in it's current state as it makes no economic sense at all.

I agree that Spain and Ireland are facing big problems. But actually, alot of that "Spanish mortgage debt" respresents loans to UK based property speculators, so Spain's problem is a UK problem too.

mattyfc, on May 11 2009, 07:15 AM, said:

The USA have an even larger credit bubble than us and similar long term debt problems.

I think that is not true. I can recall seeing figures where the UK had the biggest household debts in the world, and I', sure it can be demonstrated that, at its peak, UK house prices were more overvalued (in relation) to incomes, than they were at the peak of the US housing bubble. Since the peak, US prices have fallen some 30%, and are near a reasonable ratio to incomes, but i think they will overshoot. By contrast, UK property prices are only 20% off the peak, and have another 35-50% to fall IMO.


If you add in household debts, the UK has more than the US

mattyfc, on May 11 2009, 07:15 AM, said:

It is pretty sensible to have 0% rates currently to try and deflate the market slowly. A rapid crash would do far more long term damage to the economy.

It is only sensible for those who "get it", and use the present bounce to get out of their property investments. It is also good for the present labour government, since they may them be able to shift some blame for the bust to the next incoming government, if the press and the public let them (I wont!) Those that lose, are those that get suckered into buying, and then see interest rates escalate.

mattyfc, on May 11 2009, 07:15 AM, said:

We need to have a long term plan to prevent HPI in the future and to reduce consumer and public debt levels. This is our real problem and politicians need to wake up and create policy to deal with this. Facing and dealing with these problems despite them not being popular will be a real test of our democracy.

OKay.
But it couldnt be simpler: Limit loans to something like 70% LTV, and if you securitise anything the bank doing the packaging should retain 20-25% on its own books. Make sure you verify the borrowers "income" independently. Force those people in the press who constantly ramp property to be transparent about home much advertsing revenues they collect from industry sources. Produce more honest price indices, not the present ones that overstate price appreciation. End the mortgage and homebuying subsidies that MPs receive.

mattyfc, on May 11 2009, 07:15 AM, said:

We can be thankfull that the financial structure of the country is currently still in tact which should have prevented a 1930's esq depression and the inevitable unemployment, political uphevel and war that it would have brought.

Instead will will have a severe reccession, 3-4m unemployed and house prices will fall back to there long term average.
Things could be a lot worse.

The 1930's style (or worse) depression is still coming. This is just a chance to exit before the next leg down hits.

My "best guess" of where US stock prices are headed

This post has been edited by DrBubb: 19 May 2009 - 06:49 AM

[DrBubb]

United Kingdom Outlook Cut to Negative at Standard & Poors

aardvark, on May 21 2009, 04:47 PM, said:

ahh, thats why the pound is falling back.

Indeed.
And watch for rates to rise too
This will KILL the Dead Cat bounce in property ... But maybe not right away.

[DrBubb]

Prof. Robert Schiller and I are on the same page,
But I doubt that the world will wake up to this reality until late summer or fall:

QUOTE
One of the world's most influential economists warns today that Britain faces the prospect of two recessions in quick succession.

Robert Shiller, Professor of Economics at Yale University, said that the recent stock market bounce should be treated with caution.

He likened the current sense of optimism to a marital row. “You don't know whether the argument with your wife is really over or not. Is the problem something that your spouse will bring up again, and again?”

The apparent upturn could soon go into reverse, he told The Times, marking a repeat of economic patterns in the 1930s and the 1980s. Such a double-dip slowdown has been nicknamed by economists a “W-shaped” recession, where recovery is so fragile, the country could be plunged into another slowdown as soon as it emerged from the last.

Since March the stock market has rebounded by 27 per cent, raising hopes that the recession may not be as severe and protracted as many economists had feared. Some have interpreted the recent rally as a sign that the banking system - which imploded after Lehman Brothers, the US investment bank, went bust in September - has stabilised and that confidence is returning.

Last week Alistair Darling, the Chancellor, brushed aside doubts that his Budget forecasts had been overoptimistic and predicted that the recession would be over by Christmas. Many economists in the City believe that Britain will stagnate until the end of 2010 and that unemployment will continue to rise well after that.

Speaking to The Times this week, Professor Shiller said: “I was last here [in London] in the fall and there is definitely a sense of optimism now. The Fed [US central bank] and the Bank of England seem to have things under control. Everything seems to be getting better.”

However, he warned that “there is a real possiblity of another recession. We may well see more bad news. It is a real failure of the imagination to think otherwise.”

He said that there were a number of issues that threatened any long-term recovery for the British economy - rising unemployment, mortgage defaults, and another wave of new company failures that “could surprise us yet”.
UNQUOTE
/more: http://business.time...icle6346115.ece

[DrBubb]

Iceland Lowers Key Interest Rate to 12%, Defying IMF (Update3)

By Omar R. Valdimarsson

June 4 (Bloomberg) -- Iceland’s central bank lowered the benchmark interest rate by a percentage point, defying the International Monetary Fund, as the economy slumps into its worst recession in 60 years.

The repo rate was cut to 12 percent from 13 percent, Reykjavik-based Sedlabanki said on its Web site today. The rate cut is the fourth since the island received a $5.1 billion IMF- led bailout in November.

Policy makers bowed to pressure from labor unions and businesses for lower rates to soften a recession that the bank estimates will culminate in an economic contraction of 11 percent this year. IMF Mission head to Iceland, Mark Flanagan, last week advised against a cut, arguing a planned gradual easing of capital controls requires higher krona returns.

The central bank agrees with “most� of the points made by the IMF, though it was Sedlabanki’s “privilege� to set the benchmark interest rate and the decision was primarily steered by the outlook for the macro-economy, Interim Governor Svein Harald Oeygard said at a press conference.

Addressing the capital restrictions, imposed at the end of last year after the failure of its biggest banks led to the collapse of the currency, Oeygard said Iceland will move toward easing the restrictions gradually this year, taking a “cautious� approach aimed at “maintaining the value of the krona.�

/see: http://www.bloomberg...id=aQb_wu2VQzv4

== == ==

Think about that...
Iceland has rates at 12%, and that is AFTER its currency collapsed !

Where do you think Iceland property prices have gone to?
(Especially in relation to hard currencies and Gold?)

This is the possible nightmare that the UK (and even the US may be facing)

[DrBubb]

Spirit, on Jun 16 2009, 05:57 PM, said:

House Prices Have Further 10-20% To Fall, says Robin Geffen

He is far too optimistic. Let's get real-istic !

Read this excerpt, and then think more deeply for a moment:

"Of course, the big difference between today and the housing slumps of the early 1980s and 1990s is that interest rates are much lower. That makes it less painful to be in debt and easier to borrow to buy. Sadly, rising unemployment may render both those considerations academic and push any monthly interest bills out of reach."

/source: Prices remain more than 25pc higher than the long-term average-Telegraph

Here's the thing:
+ Higher rates were one of the things that pushed house prices lower in the early 1980s and 1990s
+ in 2008/9, The UK's cowardly, corrupt, and wrong-headed leadership saw that it was unwilling to "take the pain"
associated with house prices falling all the way back to sustainable levels, so
+ Unlike the USA, UK authorities whimped out early, and cut rates to historical low levels,
+ This trick provides only a temporary delay in the house price decline,'
+ Eventually rates will be pushed back up as the currency falls and inflation escalates,
+ Then, affordability measures based on higher rates will mean that home prices will need a
DEEPER FALL, and I am thinking of -35 to 50% from current levels

[DrBubb]

A drop in western living standards - rather than the end of life as we know it - seems the most logical outcome to me

Bloo Loo, on Jun 17 2009, 07:45 AM, said:

well, maybe if we want a wicker basket, we will have to pay £100 for it rather than the £2 we currently do.

offshoring was never a good thing for the economy, but, the great and the good decided we would do well to get out of making things and go to the next paradigm, which was selling our knowledge.
basically, a knowledge based economy is having the knowledge to sell things that dont exist. banking, insurance and comms are these things.
trouble is, when you are short of cash because the banking system has been replicate throughout the world, and it crashes, insurance and comms are the things people dont need any more.

they need food, water and shelter.
knowledge of how to get these things is all they need.

Good post.

To me now, the question is : Will this end with a Financial Crash?

Or will the US and the Uk get dragged BEYOND FINANCIAL CRASH ("BFC") ?

I think : BFC.
And that needs some very different preparations than a mere Financial Crash